Because Mainstream Personal Finance Advice Is Not What It Should Be

I have just discovered that Consumer Reports, the go-to place for the lowdown on vacuum cleaner reliability, also gives personal finance advice. Who knew? Today I stumbled across their Money Blog, which carries a post on how you should pay off your mortgage before you retire. It is enough to make me worry about their vacuum cleaner wisdom.

Permit me to quote the first two paragraphs:

Back when the stock market seemed to go in only one direction—up— you could make a decent case for keeping a mortgage as long as possible. Why rush to pay off a debt at, say, 6 percent, when the same money, invested in the stock market, was all but guaranteed to return 10 percent?

That kind of thinking may help explain this startling finding in a just-released Society of Actuaries report: Only 48 percent of retirees surveyed in 2009 had completely paid off their mortgages, compared with 76 percent in the group’s 2007 study.

Two problems with this jump out at me. The first is the remarkable implication that retirees were more optimistic about stock market returns in 2009 than they were in 2007. In hindsight, this was the correct stance, we all ought to have sold every share we had or could borrow in 2007 and then mortgaged the house and pawned our smaller possessions to buy stock in 2009.

But, as a matter of fact, most investors were complaisantly optimistic about stocks in 2007 and scared out of their minds in 2009. Did the author of the post forget this? Or did he just carelessly trip up his own logic?

I am voting with carelessness, partly based on the second big problem here. The “startling finding” is startling because it isn’t true. The portion of surveyed retirees in 2007 who had paid off their mortgage was 50%, not 76%. To be fair, the press release from the Society of Actuaries does say 76%. But a less careless blogger might have noted that, if true, that number would have been startling to the point of implausibility.

For one thing, it would go directly against the gist of the press release, which is entitled “Despite High Levels of Concern Over Retirement, New Actuarial Study Sees Little Change Among Americans in Planning for the Future.” For another, this is not a survey of the newly retired, but of all retirees, meaning that the 2007 and 2009 groups are largely the same bunch of old folks. In order for the number to have gone from 76% to 48% mortgage-free about a quarter of all retirees would have had to take out new mortgages on their homes.

The much more plausible and utterly non-news 50% number can be found in a table in the actual SOA report, linked to by the press release. Some people may think it is too much to ask of a blogger that he go the extra click to verify a startling and improbable statistic around which he plans to spin a post. I am not one of those people.

The post ends up recommending that you pay off your mortgage before retirement. It gives two reasons, the second of which is a logical, if a little vague, argument that paying off a mortgage is a good investment. Having already discussed that fairly complex issue three times in the last month I am not going to go into it again today. (But you can click here, here, and here if you wish.)

The other reason Consumer Reports gives to pay off your mortgage is that “our surveys have shown a strong relationship between being debt-free and enjoying a happy retirement.”

Is asking people if they are happy about some personal financial maneuver the right way to determine if it is a good idea? I wonder what you would have found in 2006 if you examined the relationship between happiness and no-money-down McMansions.

More to the point, is it not obvious to everybody else that people with no mortgage debt tend to be, on average, richer than those with debt? Couldn’t it be that retirees without mortgages tend to be happier because they tend to be richer? A person could argue that they are richer because they have no debt, but that is not as easy an argument to make as some seem to think, and in any case if being richer is the goal why are we talking about happiness at all?

Disclaimer

All advice in this blog is guaranteed to be worth at least what you paid for it, or double your money back. All persons dealing with matters of personal finance are advised to gather information from blogs, books, radio and TV, consult with professionals, discuss the matter with anybody who will listen, and then make their own decision. Because it’s their money.